Monday, January 16, 2017

Economic growth Vs development

Don’t judge Uganda by where it is but by the speed at which
it is growing

I have been arguing that Uganda’s economy has been growing
at an impressive rate over the last 30 years. Many readers have written to me
saying that although we are growing economically, we are not developing. This
shows a misunderstanding of the relationship between growth and development.
Economic growth refers to a quantitative increase in the goods and services
produced within an economy in a given period of time. Development is a
qualitative increase in the same.

For a country to develop, it has to grow over a very long
period of time. Economic growth is, therefore, the mother of economic
development. No country can develop without sustaining economic growth over
decades. And no country can sustain economic growth for decades and does not
develop. This is because growth over the long run is only possible by changes
in technology and in the mode of organisation. Therefore, long run growth
fosters structural change i.e. development.

How does our country fit in this story? We cannot judge
Uganda by where it is but by the speed at which it is growing towards a
particular level of per capita income. Even with all its weaknesses, GDP per
capita remains the best proxy to measure the wellbeing of a country. Per capita
income gives us an idea of potential per capita revenue, which in turn gives us
an idea of per capita spending. How much a government spends per person has
powerful implications on its ability to provide a large basket of public goods
and services to its citizens in order to improve their wellbeing.

Over the last 30 years of President Yoweri Museveni’s rule,
Uganda’s growth has averaged 6.74% per year, making it the 17th fastest growing
economy in the world, the 4th fastest in Africa out of 189 countries on the IMF
list. When you remove mineral rich countries from the sample (because they are
enjoying God’s or nature’s bounty), Uganda is the 10th fastest growing economy
in the world, first in Africa.

But why is our country still poor with a per capita income
of $670 in nominal dollars (depending on the exchange rate) and $2003 at
purchasing power parity? The best explanation can be found in what economists
and statisticians call “The Rule of 72.” It states that if anything under
measurement grows at an annual rate of 1%, it would double every 72 years. But
if anything grew at an annual rate of 7%, it would double every 10 years. Now
7% is about the fastest rate of GDP growth any country has registered over a
long period of time, 25 years.

This means it takes very long to realise fundamental
differences (structural transformation) when you begin from a very low base.
Imagine a country that begins at a per capita income of $150 today and grows at
the supersonic speed of 7% per year. In the first ten years, it will reach
$300, in 20 years $600, in 30 years $1,200. There isn’t a fundamental
difference between a country with a per capita income of $300 and that of
$1,200. They would all still be regarded as poor. Yet sustaining high rates of
GDP growth, leave alone per capita income growth, over the long term is very
difficult.

In his book “The Next Convergence”, the Nobel laureate in
economics, Michael Spence, found that between 1950 and 2005 only 13 countries
in the entire world sustained an average rate of GDP growth of 7% and
above. Uganda’s 6.74% growth over the last 30 years is close to the
world’s best record. Also remember that per capita income is calculated by
deducting the rate of population growth (Uganda’s average over the last 30
years is 3.24) from GDP growth. Therefore, Uganda’s per capita income has
been growing at an annual average rate of 3.5%.

Hence, although Uganda has been able to almost double GDP
every 10 years, it could only double per capita income every 20 years. Uganda’s
per capita income was $403 in 1986. But this figure is misleading because at
that time the price of the dollar was determined by government, not market
forces. The only way to get an accurate figure is to find the price of the
dollar on the black market in 1986, which I have failed. The foreign exchange
rate was liberalised in 1991 and Uganda’s per capita income fell to $160 ($283
in 2016 prices). Today it is about $670 depending on the exchange rate.

If you think Uganda is crawling, look at this: the USA has
the world’s 10th highest per capita income at $56,000. In fact it has the
highest per capita income among large nations with a hinterland. This is
because it sustained per capita income growth at an annual average rate of 2%
between 1900 and 2010. In Europe only West Germany (between 1950 and 1975)
sustained a higher per capita income growth rate (at 3.8%) than Uganda under
Museveni. East Asia’s growth rates (at 5.8%) are therefore unprecedented
historically.

Uganda’s per capita income growth has been severely undercut
by a very high population growth rate, the second highest in the world. If our
population grew at 1%, our per capita income would have grown at 5.74%, which
is almost the average for East Asian nations (5.8%) during their intense period
of transformation. Whom do we blame for our nation’s love of many children? The
opposition is likely to say Museveni. Whoever is to blame, a high population
growth rate means fewer working people paying for very many defendants, a
factor that reduces the rate of savings and, therefore, investment.

Thus, Uganda is poor not because Museveni has performed
poorly on the economy but because he began from a very low base and also
because our people love to produce many children. Uganda reached a peak in per
capita income in 1970. From then the economy declined till 1987. Museveni spent
the first 13 years of his administration digging Uganda out of a pit, and our
country regained her 1970 per capita income in 2000. That means we lost 30
years. In fact, the best way to judge Museveni is to begin in 2000.

Over the last 15 years, (2000 to 2014), Uganda’s economy
grew at an annual average rate of 6.82% – an impressive number by historical
standards. It has been the 19th fastest growing economy in the world, 10th in
Africa. When we remove mineral rich nations from the sample, Uganda becomes 9th
in the world, 3rd in Africa behind Ethiopia (1st) and Rwanda (2nd). Therefore,
Uganda is on the right path economically.